If you’re always busy servicing clients or customers but you don’t have any money in the bank, there’s probably some place you haven’t looked for cash – your Accounts Receivable. If you don’t have a system in place which allows you to capture your billings and collections activity, regardless of how many clients or customers you service, you are at their whim when it comes to getting paid for services rendered or products sold. As a matter of fact, you’re probably playing bank to significantly more clients or customers for significantly more dollars than you can imagine. The first step toward improving collections is to analyze your Accounts Receivable using some objective standard of measurement.
Whether you have a one man operation, or you’re staffed with many associates, if you extend credit, you need a practical, workable system for keeping track of how much money you’re owed. Beyond that, you need specific procedures for keeping track of when the clients or customers are supposed to pay you, and if they go past a due date, you need a system of follow-up procedures to gain commitments to ensure payment from those people who owe you money.
How can you tell if they owe you money, if so, how much, and how long they have owed it to you? By producing an Accounts Receivable Aging Report monthly at a minimum but having it updated during the month is even better. Quite simply, the Aging analysis includes accounts receivable balances by client or customer, broken into age category. “Age” is the period of time an amount has been owed to you, and is usually expressed in days: 0-30 days old; 61-90 days, etc. A June bill, if unpaid at the end of June, would be in the 0-30 days or “Current” category. A May bill, if unpaid at the end of June, would be put in the 31-60 day category. Similarly, an unpaid April bill would go in the 61-90 day category of a June report, etc. The Aging Report should show total billings as well as the detail or Aging by client or customer. Ideally it also includes date of last payment and amount paid. All contact information should also be captured here to create efficient follow-up.
The system need be no more complicated than this to enable you to “dial for dollars.” Any basic software package will provide this and more. The software must simply enable you to capture billings, payments on account, billing adjustments, ending balances and the ability to track aging. This information and as importantly, consistent follow-up procedures which include telephone calls and a series of collection letters, is all you need to keep cash flowing.
The keys to successful collection are persistence and commitment. You must gain commitments form each client or customer as to when you will receive payment and how much you will be paid. If you don’t receive payment by the promised date – call back that day – don’t wait even 24 hours! If clients or customers think they can put you off they will – but only if you let them.
If you don’t want to make Accounts Receivable calls, delegate the responsibility to someone in your office – and make it your job to see that that person manages the billing and collection procedures.
Remember the longer you wait in your pursuit of balances, the less chance you have of collecting what is due on accounts. More to the point, the longer the balances are outstanding the less likely it is that you will collect them and the amount collected will continue to diminish with age.
There are four steps to successful cash management:
- Provide a quality service or product.
- Bill it TIMELY.
- Collect it.
- Hang onto the cash as long as possible.
Inadequate collection policies and procedures may result in cash flow problems, collections of only a fraction of the original billings and a rapid deterioration of your business. This can be avoided by developing the procedures and the habits outlined above. Develop a system of letters and phone calls, and stick to it. Your clients or customers will learn what to expect from you and will respond to and established plan of action. Remember “Cash is King!”
This article was written by Gary Field, CPA at Numerico, PC. Click here to view Numerico’s website.
